Productive Consumption and Growth in Developing Countries

Productive consumption enables the satisfaction of current needs and increases the productive potential of labor. The productive-consumption hypothesis is of fundamental interest because it modifies the "harsh" intertemporal consumption trade-off traditionally assumed. The incorporation of the productive-consumption hypothesis into a simple endogenous growth model reveals the following implications: (a) the possibility of a poverty-trap, (b) the rule of optimal consumption turns into a modified Keynes-Ramsey rule, (c) the (effective) IES is based, among others, on the technological opportunities to enhance human capital due to productive consumption, (d) a rising saving rate, and (e) transitional dynamics to an asymptotic balanced-growth path